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Apple's timing on bond sale will save company $724 million or more

updated 08:30 pm EDT, Mon June 3, 2013

by MacNN Staff

Savings on longest-term bonds could add up to billions, say analysts

Whether by coincidence or foresight, Apple could hardly have picked a better day than April 30 to have sold its first bonds since 1996, raising $17 billion to be used towards stock buybacks and increased dividends. Apple has announced that it intends to return $100 billion to stockholders over the next few years, but opted to go into debt to do so rather than "repatriate" some $45 billion in foreign profits -- finding that historically low interest rates would cost the company dramatically less than paying the 35 percent corporate tax on the offshore earnings.

May has seen a rise in bond yields that would have cost the company hundreds of millions more over the life of the bonds had Apple offered them on May 31 instead of April 30. Apple easily raised the $17 billion it sought with Aa1 (Moody's) and AA+ (Standard & Poor's) rated offerings, spread out in six parts that have different maturity dates. The shortest due date on the bonds is 2016; the longest comes due in 2043. At the time of sale, 10-year US Treasury bond yields were set at 1.67 percent, compared to the 2.13 percent they now command.

This means the company will save $40 million in annual interest, and some $724 million over the life of the longest bonds compared to today's rates. The offering was the biggest bond sale in US history, according to Bloomberg, which also calculated the savings. Yields on bonds rated similar to Apple's fell to an all-time low of 2.225 percent last month, compared to 8.874 percent in 2008 during the worst of the recession. Apple is also estimated to have saved some $9.2 billion in potential taxes by not having tapped into its foreign earnings to help pay for the buyback and dividend program.

The longest of Apple's bonds, the 30-year notes, fell some eight percent in value over the last month, now selling at 92.084 cents on the dollar -- pushing the yield to 4.32 percent. Selling that same debt on May 31 rather than April 30 could have cost Apple an additional $400 million annually for 30 years.

The savings reinforce Apple CEO Tim Cook's argument before Congress that overall reform on both America's corporate tax rate and the loopholes, deductions and credits granted to corporations is desperately required. Cook told the panel flatly that the repatriation rate would have to be in the "single digits" before most multi-nationals, including Apple, would considering bringing home foreign-earned profits that the companies point out have often already had foreign taxes taken out of them in the countries where they were earned.

In part, this is due to the "rock and a hard place" position companies like Apple find themselves in. As a publicly-traded company, they have a legal obligation to maximize profits and returns to investors -- which mandates using every available loophole to legally reduce tax burdens. At the same time, historically-low interest rates make it actually cheaper to borrow money for US investment compared to "repatriating" foreign profits, given that the US has one of the highest corporate tax rates in the world currently.

Though Apple and other tech companies had recently lobbied Congress for a temporary "tax holiday" that would reduce the rate so that corporations would repatriate their foreign profits, Apple now appears to have given up on that approach. It is currently proposing reform similar to what President Obama has long been in favor of -- a permanent lowering of the corporate tax rate (to something in "the mid-twenties" as Cook describes), along with the elimination or change to many of the loopholes and deductions that critics say amounts to "corporate welfare" -- and allows US multinationals such as GE to have an effective tax rate of zero -- or even negative tax rates after subsidies, deductions and other credits are applied.

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